Prior 2009, foreigners were not allowed to purchase the Czech real estate. As a solution for purchasing the real estate, a Czech company was registered for which the real estate property later on was purchased. Because a change of real estate ownership from a company to founders was a subject to a real estate transfer tax in addition to an income tax costs, no one performed the property’s transfer to actual owners. Starting 01.12.2019, the property transfer tax was eliminated, which opened up the possibility of changing the ownership with small losses. The main obstacle is a low residual value of a real estate on a company’s balance sheet. If the transfer is made in the form of a regular property sale, it will lead to a significant corporate tax payment for the company.
What are the options for transferring real estate from a company to an individual?
There are several choices:
1. Transferring a company’s real estate property to an ownership of a founder without a classical company liquidation
This is one of the options for transforming a company. A real estate property (including liabilities) is transferred to a founder who is an Individual Entrepreneur (a holder of trade license). As a result, the Individual Entrepreneur funnels out this commercial property for personal use. After the property transferred to oneself, the property could be sold or donated as a deed of gift.
Conditions:
- there should be only one founder who owns the company, otherwise other founders will have to pay the market share price of the property value, which will complicate the process
- the founder has to be registered as an Individual Entrepreneur (a holder of a trade license) at a time of the property ownership transfer
Advantages:
- quick process of the property transfer and simplified process of company liquidation
- no need for the real estate appraisal at the time of the property transfer
- easy process of a company liquidation, because the company with “no assets” is being liquidated, there is no need to wait 3 months for possible creditors’ appeals/claims, as it usually happens during the standard company liquidation procedure; and there is no need to obtain a consent from the tax authorities regarding the process of the company liquidation
Disadvantages:
- Requirement to register as an Individual Entrepreneur (a holder of a Trade license)
- For period when the Individual Entrepreneur is registered, it will be required to pay the minimum monthly insurance premiums for social and health insurance, unless the Individual Entrepreneur trade license is registered as a “secondary activities” (vedlejšá činnosti)
- To register as the Individual Entrepreneur, you have to hold at least a Czech residence permit or a status of an EU citizen
2. Transferring a company real estate as a natural liquidation balance during a company liquidation
In the event of a company liquidation, founders are paid a liquidation balance in monetary terms or in kind (property). In case of transfer of property in kind, it is necessary to assess the market value at the time of liquidation of the company.
Advantages:
- no requirement to register as an Individual Entrepreneur with a Trade license (for an Individual Entrepreneur registration, you have to be a holder of a Czech residence permit or a EU citizen status, and to obtain a ‘police clearance’ certificate)
- no need to pay monthly social and medical insurance deductions, pending the Individual Entrepreneur’s license termination. In 2021, the total for the SSZ and VZP insurance payments is 4981 CZK / a month. No requirement to pay the VZP and SSZ deductions, if the IE has at least a monthly minimum wage “employment income”, or due to being a student, or due to being on a maternity leave, etc.
Disadvantages:
- Longer process (classic company liquidation takes about 5-6 months), and a property ownership change in the cadastre requires about a month
- Additional costs for accounting services (preparation of an interim balance sheet, a liquidation balance sheet)
- Requirement to obtain an expert assessment of the real estate market value
3. Sale of real estate from a company to a founder
This option in terms of paying taxes is usually the least cost-effective. One can sell a real estate to a close relative/loved one at a price no lower than a market value property price. As a rule, the market price differs significantly from the property’s residual book value. As a result, firstly, the company will pay income tax at a rate of 19%, and then, secondly, dividends will be paid to founders, after this, and thirdly, the founders themselves will have to pay 15% income tax on dividends received.
Advantages:
- No requirement to register as an Individual Entrepreneur, no need to liquidate the company
- Quick transfer of the real estate ownership
- Not required to obtain an expert assessment of the real estate value
- Low processing costs
Disadvantages:
- As a rule, there will be very high taxes to be paid
- A company itself with “no assets” will become unwanted / with a low market value
Properly selected option for the company’s real estate transfer to an individual could save hundreds of thousand CZK on taxes, and sometimes you will not have to pay a single koruna CZK.
In a given example below, it clearly shows a benefit of a particular option:
Situation:
In 2007, a company purchased a real estate for 4000000 CZK; for a real estate acquisition the company’s founder invested money in the form of a founder’s loan in the amount of 3800000 CZK. Today the real estate property market price is 7000000 CZK. A residual book value as of 31.12.2020 is 2176000 CZK. A debt balance to the founder as of 31.12.2020 is 2500000 CZK. An authorized capital is 200000 CZK
Solutions:
Option 1. Transfer a real estate ownership via transformation of a company (s.r.o.) into an Individual Entrepreneur Trade license:
7000000 – 2176000 – 200000 – 2500000 = 2124000 CZK, where a personal income tax 15% = 318600 CZK
Option 2. Transfer a real estate via payment of the liquidation balance in kind:
7000000 – 2176000 – 200000 = 4624000 CZK, where a personal income tax 15% = 693600 CZK
Option 3. Sale of real estate:
7000000 – 2176000 = 4824000 CZK, where a corporate income tax 19% = 916560 CZK. Net profit of the company after tax = 3907440 CZK, an income tax on dividends 15% = 586116 CZK; total tax burden = 1502676 CZK
We know how to arrange a format for the real estate transferring from a company to an individual so that the income tax payable is 0 (zero) CZK.
Questions and Answers
- Will I pay income tax if after transferring the real estate property from a company to myself I would like immediately to sell it?
To be exempt from an income tax payment, which might arise from the subsequent real estate sale, a founder will have to fulfill a condition: for at least 2 years, before the property is sold, use this real estate for personal household purposes.
- Could a company sell the real estate for a low price to my family members or me or gift it?
A special transfer pricing regulates the sale to a close relative/loved one. This means that the income of your close relative/loved one will be calculated based on the property market value price, regardless of the price specified in a purchase and sale agreement. In addition, a restriction was introduced in matters of a donation/gifting of the company property to affiliated persons.
Does your real estate property is registered to a company (s.r.o.) that you no longer need, and that drains large financial costs for maintenance every year? Contact the DoMyTax specialists, and we will assist you to find such an option for the real estate transfer so that you incur the minimum tax costs in the process. We also will take care of all the stages of the real estate transfer from your company to an individual and the company liquidation process.
